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India in the midst of Resurgent dollar, Falling oil & Emerging markets

, March 20, 2015, 0 Comments

The Indian stock market has been on a roll since end 2013, as poll forecasts started to predict the end of the corruption ridden and rudderless, leaderless Congress government and the potential win of the BJP led by reformist Narendra Modi. Since then the stock markets have climbed up by more than 50% as the predictions came true and the new government started to slowly but surely unveil reforms and cut wasteful expenditure.

There has also been no new scams under the new government unlike the old one where every month there was a new scandal – oil, telecom, realty, sports, coal, media etc.

The Indian stock market touched a new high with Sensex crossing 30,000 for the first time in its history. However, the markets have started to fall since then and fell by around 3% in the last week. Not a significant fall and cannot really be said to be a change in trend. However, the global macro picture has become darker and darker by every week. Emerging markets such as Turkey, Russia, Brazil etc. have been falling sharply as dollar increases in strength.

These countries are suffering from the sharp falling commodity prices and issues with their political management. Inflation is rising in these countries and confidence is falling. They are also suffering from deep corruption problems – Petrobas in Brazil, while Russia is basically institutionally corrupt with some putting Putin’s wealth at more than $100 billion.

Though India has remained almost totally insulated to the macro issues with foreign investors pouring billions of dollar every month, it cannot remain immune to the global decrease in equity valuation for emerging markets. While European and USA stock markets remain near the peaks, valuation for emerging markets have come down. India is a huge beneficiary of falling oil prices which has helped cut inflation and trade deficit.

So falling oil is not a problem but there is a reverse side. Falling oil is not only due to higher supply, but portends slowing and falling demand. This will hurt India’s exports as main markets in Europe and China slow down. India’s currency has appreciated sharply against Euro, Yen and other currencies which makes it harder to export and grow its economy.

Some commodity price falls are hurting domestic companies such as Hindalco, Cairn, ONGCetc. These companies will have to lay off workers as they see slowing growth. This will offset some of the large gains being made by Indian consumers and manufacturing companies. A global risk off could hurt India immensely, as it is still trying to grow back its manufacturing and service engine. Sentiment has improved sharply but situation on the ground has not.

If there is a financial event globally, then sentiment could reverse dealing a strong blow to India’s growth chances. India is dependent on foreign capital for growth given the high cost and limited capital in India. If foreign investors turn their backs due to risk aversion, then it will decrease India’s potential growth.

All said, India will remain one of the world’s best growth stories over the next 5 years. However, growth rates may not be that high.